How Much Does Custom Software Development Cost in 2023? Multifactor Cost Estimation

by Sasha B. on Jul 11, 2023

Have you ever wondered why the Colosseum, an architectural masterpiece of ancient Rome, still stands firm despite enduring centuries of weather, war, and earthquakes? It’s the same principle that explains why the software system that underpins your business can either be a launchpad for success or an Achilles’ heel of inefficiency: design and development matter.

Much like the enduring Colosseum, the code of your software serves as your business’s digital bedrock — a pillar of your system’s longevity and adaptability. As we try to explain how to calculate software development cost, remember: this isn’t just an expense, but an investment into your business’s durability and success. Let’s dive in.

Is It Time to Estimate Software Development Cost and Invest in Product Development?

Welcome to 2023, a year of growth and resilience. As a business leader, you’ve weathered the storm of a global pandemic and now stand poised for expansion. You’re acutely aware that the next phase of your business’s success hinges on a tailored software solution. This isn’t merely an upgrade; it’s a transformative investment, a catalyst set to propel your operations, profits, and customer satisfaction to new heights.

However, the daunting questions loom: What’s the price tag attached to this pivotal move? How much does software development cost?

As much as we’d love to provide you with a straight, off-the-rack number, the reality is this: the cost of custom software development in 2023 is a complex function of various factors and variables. It’s a labyrinth, but fear not – we’re here to guide you through the intricate landscape, deciphering elements, and variables, providing hard numbers, real-world examples, and clear benchmarks.

So sit tight, and let’s navigate this labyrinth of software development project costs together.

Software Cost Factors: Top Ingredients That Affect the Cost for Software Development

Welcome to the rollercoaster ride that is the universe of custom software development costs. It’s a realm of dramatic highs and lows, where a single decision can either shoot costs through the roof or smartly bring them down to the ground. Here we start.

Software Development: A High-level Cost Breakdown

Consider the creation of a custom software solution as akin to building a house. You wouldn’t start without a blueprint, would you? You’d need to account for the land, materials, design, labor, and so on. The costs in software development follow a similar pattern following the development process logic. Here’s a simplistic breakdown:

Discovery and Planning (10-15%): This is the blueprint phase. It’s all about understanding your business, the problem at hand, and how this particular software can help. The output? A software project plan detailing the scope, timelines, and resources.
Design (10-15%). Now, we’re selecting the color schemes, fixtures, and layouts. In software terms, it’s about creating an engaging user interface (UI) and seamless user experience (UX).
Development (40-50%).The main construction phase. Your software is coded and integrated by the development team. You can see why software development rates, namely software development cost per hour, is so important — it will count for at least half of the total price tag.
Testing and QA (20-25%). Before you move in, you’d inspect the house, right? Testing ensures that your software works flawlessly across various scenarios and devices.
Deployment and Maintenance (10-20%). Finally, the software is released into the wild and continually fine-tuned for optimum performance.

While this provides a general sense, remember that each project has its own idiosyncrasies.

The Devil in the Details: What Drives the Cost?

You may be wondering, “Why such broad cost ranges?” The devil, as they say, is in the details. Several factors sway these percentages and can drastically impact your bottom line:

Complexity of Software and Scope. A single-story bungalow costs less than a skyscraper. Similarly, a basic website with a few static pages will be cheaper than a complex, feature-rich mobile application.
Technology Stack. Some technologies demand higher developer skill sets and licensing fees. The choice between a Ferrari (high-end tech stack) and a Ford (more affordable tech stack) will obviously impact the budget.
Team Expertise / Development agency level. Experienced developers may command higher wages, but their proficiency often leads to fewer errors and faster delivery, offering better long-term value.
Geographical Location. Just like labor costs vary from New York to Nebraska, development costs can differ between Silicon Valley, Eastern Europe, and Asia.

Remember, diving deep into software development cost breakdown is not about cutting corners. It’s about making informed decisions and setting realistic expectations. Software development is an investment, and like any investment, the aim is to achieve maximum return. The trick lies in balancing cost-effectiveness with quality, functionality, and timelines, a subject we’ll delve deeper into later.

Calculating Your Average Cost: Multifaceted Software Cost Estimation in 2023

Whether you’re a bustling startup or a corporate powerhouse, your custom software development budget plays a central role in your strategic planning. But before you can budget, you need to estimate — a task easier said than done.

Outsourcing Rates Around the Globe

In 2023, the cost of hiring a software developer varies greatly depending on geographical location. Here are average hourly rates for software development services in different regions:

North America (USA, Canada): $100-$170 per hour
Western Europe (Germany, France): $60-$120 per hour
Eastern Europe (Ukraine, Poland): $30-$60 per hour
Asia (India, Philippines): $20-$40 per hour
Latin America (Argentina, Brazil): $30-$50 per hour

These figures offer a rough estimate and actual prices can vary based on the developer’s expertise, project complexity, and other factors. We will predominantly operate with Eastern European software development team costs further. However, you can easily crunch the numbers yourself, changing Ukraine/Poland originated product development costs to rates from other countries.

Inevitable Costs: Accounting for the Price of Tech Stack and More

No matter the scale or type of your software product, there are certain costs that inevitably come into play. These range from your choice of tech stack to third-party services, and can significantly affect your total budget. Let’s break these down:

Tech Stack Costs

The technologies you choose to build your software play a significant role in determining your costs and don’t depend much on the size of the project:

Backend Development: Depending on the complexity of your software, backend development can consume a major chunk of your budget. For instance, Python developers in Eastern Europe charge an average of $40-$50 per hour. If you’re looking at a more complex language like Java, the cost could go up to $50-$60 per hour.
Frontend Development: For frontend, JavaScript remains a popular choice and can cost you around $35-$45 per hour in Eastern Europe.
Mobile App Development: If you’re building a mobile app, you might choose Swift for iOS (around $45-$55 per hour) or Kotlin for Android (around $40-$50 cost per hour).

Remember, these are average prices and can vary significantly based on the complexity of the work and the developer’s expertise.

Software Infrastructure

When trying to calculate the average cost of software development, remember that the servers and databases you choose can add up, especially as your software scales:

Hosting: Depending on the size of your app and the number of users, monthly hosting costs on a platform like AWS can range from $20 for a small app to several thousand dollars for large-scale applications.
Database: Services like PostgreSQL and MySQL are open-source and free to start, but can incur costs as you scale and require additional features.
Data Storage: Costs for data storage services like Amazon S3 start at $0.023 per GB for the first 50 TB/month, and decrease as you store more data.

Third-party Services

Incorporating third-party services can streamline your operations, as well as influence the estimate of the software development:

Payment Gateway: Services like Stripe and PayPal charge a fee per transaction, typically around 2.9% + 30¢ per successful charge.
Email Service: Providers like SendGrid offer plans that start at $14.95/month for up to 40,000 emails (sometimes also depending on the type of software due to security implications).
SMS Service: For sending notifications and OTPs, services like Messente charge €0.01 per message sent or received.

While these inevitable costs can add up, remember that they also provide value to your software. The key is to strategically choose technologies and services that offer the best return on your investment.

So, now that we’ve gotten a feel for the overall landscape, let’s step up our game. Ready to master the art of software development cost estimation? Onward we march.

How Do We Estimate Software Development Price? Cost Estimate Strategy

Now that we’ve journeyed through the wilderness of custom software development costs, it’s time to set our sights on the enigmatic art of cost calculation. It might seem like a daunting task, but armed with the right tools and knowledge, you can crack this code. Let’s take the leap together.

The Crystal Ball of Software Development: Predictive Cost Models

Just as astronomers use models to predict celestial events, project managers (PM) have their own crystal ball for software development: predictive cost models. These models are mathematical algorithms that use project parameters to estimate costs. Let’s uncover the three most commonly used models:

Basic Effort Multiplicative Model (BEMM): It’s the software equivalent of estimating the time to drive based on distance and speed. If you know the average productivity (function points per person-month) and size of the software (in function points), you can estimate the effort required. Multiply this effort by the average price per person-month, and voila, you have a rough cost estimate.
Constructive Cost Model (COCOMO): A more sophisticated model, COCOMO takes into account various project and product attributes, such as complexity, team experience, and software reliability, making it more accurate but also more complex.
Software Lifecycle Management (SLIM): As the name suggests, this model takes a lifecycle approach, considering the entire span of the project, including planning, development, and maintenance costs.

While these models provide a good starting point, remember, they’re not fortune tellers. They offer educated guesses, not certainties. And that’s where the human touch comes in, seasoned PM and analysts who can consider the nuances and intricacies that these models might overlook.

Case Study: Estimate the Cost of Software with Us

To bring this to life, let’s take a quick dive into a real-world example. Imagine a mid-sized company, let’s call it TechEdge, planning to develop an in-house project management tool. They have a clear scope but are unsure about the cost.

Using the BEMM model and past data, the PM estimates that the software will be about 500 function points in size and that their team’s productivity is typically around 5 function points per person-month. Using an average price of $5,000 per person-month (in-house, UK), they can estimate the cost:

Effort = Size / Productivity = 500 FP / 5 FP per person-month = 100 person-months.

Cost = Effort * Cost per person-month = 100 person-months * $5,000 = $500,000.

But this is just the starting point. The project manager takes into account their team’s specific expertise, the complexity of the project, potential risks, and several other factors to refine this initial estimate and give you an idea of how much it will cost to finish this endeavor successfuly. After all, no battle was won with maps alone; the general’s strategy makes all the difference.

Up next, we’ll delve into the age-old debate: in-house development versus outsourcing. Keep your explorer hats on; there’s a lot more ground to cover.

The In-house vs. Outsourcing: Turf-Based Development Team Cost Factors

Every business leader navigating the labyrinth of software development has encountered this fork in the road: do you rally your troops and take on the task in-house, or do you enlist the services of an outsourcing provider? This decision isn’t just about costs — it touches on aspects like control, communication, talent, and scalability. But let’s be real, the financial implications can often tip the scale. Let’s break it down.

The Price Tag of In-House Development: Visible and Hidden Costs

In-house development is akin to cooking a meal at home. You have complete control over the ingredients, the process, and the outcome. Sounds appealing, right? But let’s peek at the price tag:

Human Resources (60-70%): In the US, the average salary of a software developer is around $110,000 a year. Multiply this by the number of developers needed, and your budget may already be stretching thin. And we’re just getting started.
Infrastructure and Tools (15-20%): Your team needs the right environment and tools to work efficiently. This includes hardware, software licenses, servers, and subscriptions, among other things.
Training and Development (10-15%): To keep your team at the top of their game, you need to invest in ongoing training and skill development.
Miscellaneous (5-10%): These are the hidden, often overlooked costs. Think employee benefits, hiring costs, turnover rates, and the cost of delays due to a steep learning curve.

Outsourcing: Cost-saving Silver Bullet or a Double-edged Sword?

Outsourcing, on the other hand, is like dining out. You don’t need to worry about cooking, but you’re also reliant on the restaurant to serve a good meal. Here’s what it might cost you:

Development Costs (70-80%): This typically includes the charges for planning, designing, developing, and testing your software. For example, the average rate for software development services in Eastern Europe is around $30-50 per hour.
Project Management (10-15%): Most outsourcing companies will include this in their package. It’s the cost of coordinating and communicating with your external team.
Miscellaneous (5-10%): This could include costs for additional services, unexpected changes, or possible inefficiencies due to cultural and time-zone differences.

Case Study: A Comparative Analysis of In-house vs. Outsourced Projects

Let’s consider a medium-scale solution projected at 2000 hours of work and estimate its cost. If you were to undertake this in-house in the US, considering an average annual salary of $110,000 and a working year of 2080 hours, the labor cost alone would be around $105,000.

On the other hand, if you were to outsource this project to an Eastern European firm charging $40 per hour, your total labor cost would be around $80,000 (potentially less, depending on type of development). Even when you factor in project management and other potential expenses, outsourcing appears to offer a notable cost advantage for custom software creation in this scenario.

However, it’s not always about picking the cheaper option. Each approach has its strengths and weaknesses, and the best choice often depends on your project’s specifics and your company’s internal resources and strategy.

Remember, numbers are your allies, not your enemies. By understanding the costs involved, you can make a well-informed decision that aligns with your budget and strategic goals. But we’re not stopping at decisions; we’re about making the most out of them. Ready to turn your costs into assets?

Software Development Costs: From Burden to Benefit through Capitalization

As we navigate the twists and turns of software development costs and actual development processes, we stumble upon an intriguing possibility. What if you could transform these burdensome expenses into beneficial assets? Sounds like some kind of accounting wizardry, right? It’s actually a financial strategy known as capitalization. It is relevant to any type of project — enterprise software, startup project, software creation from scratch or various development efforts to teak the existing software.

Let’s pull back the curtain.

The Accounting Magic: Converting Expenses into Assets

Capitalizable Costs. Not all costs in software development qualify for capitalization. Here’s a breakdown of what typically can and can’t be capitalized:

Can be Capitalized. Costs incurred during the application development stage, which involves designing, coding, testing, and installing the software. This could include expenses like salaries of the development team, costs of testing software, and payments made to consultants.
Cannot be Capitalized. Costs from the preliminary project stage (planning, analysis) and post-implementation operation stage (maintenance and training).

Amortization. Capitalized costs are then systematically expensed over the software’s estimated useful life, often between 3-7 years. This process is known as amortization and it works like this:

Determining Useful Life. This is typically based on factors such as the software’s expected life cycle, the pace of technological advancement, and the durability of the software.
Amortization Schedule. After determining the useful life, an amortization schedule is created which outlines how the software development cost will be expensed over its useful life.

Impairment Test. An annual impairment test is usually conducted to determine if the software’s value has decreased beyond the expected depreciation. If it has, an impairment loss is recorded.

Revisiting Amortization. If there’s a significant change in the way the software is used, or its maintenance costs, the company may need to adjust the amortization process.

Using the previous example, a company incurs $500,000 in capitalizable costs while developing software with a useful life of 5 years. This cost is then spread over five years, leading to an annual expense of $100,000 on the income statement.

But, suppose in the third year, the company determines that due to rapid technological advancements, the software’s useful life is only 4 years. In this case, the remaining unamortized cost ($200,000) will now be spread over the remaining 2 years, leading to an annual expense of $100,000 for the first two years and $100,000 for the last two years.

This process of capitalizing and amortizing software development costs not only helps in smoothening the financial impact but also aligns the cost with the benefit derived from the software, providing a more accurate picture of the company’s profitability.

Balancing Act: When Does Capitalization Make Sense?

While capitalization can be a financial lifesaver, it’s not always the right move. Consider it like opting for a mortgage instead of paying full cash for a house. It lightens the immediate financial burden but also prolongs the commitment.

For capitalization to make sense, the benefits should outweigh the administrative costs and the risk of impairment (the software’s value decreasing over time). Here are a few considerations:

Project Size. The larger the project, the more sense it makes to capitalize the costs, as the benefits of spreading out large expenses are more significant.
Project Lifespan. If the software is expected to provide benefits over several years, capitalization becomes an attractive option.
Financial Health. Companies in good financial health might choose to expense the costs right away, while those in tighter situations might prefer to capitalize.

Case in Point: Imagine a company, FinTech Innovators, that undertakes a major project to develop a new banking app. The project takes two years and costs $2 million, with $1.5 million eligible for capitalization.

If they choose to capitalize, instead of taking a massive $2 million hit in the development year, they can spread the $1.5 million over the software’s useful life, let’s say 5 years. This results in a yearly expense of $300,000, significantly improving their financial performance metrics in the short term.

Understanding the concept of capitalization unlocks a new perspective on the cost to develop software. Instead of just seeing the price tag, you now also see an asset that can yield returns over time. And, as you become more adept at handling these costs, you’ll soon find that there’s always room to optimize. Up next: mastering the art of cost minimization.

Minimizing Cost of Software Development: A Strategic Approach to Time and Cost

In business, every dollar saved is a dollar earned. When it comes to software and web development, this couldn’t be more true. Cost minimization isn’t merely an exercise in penny-pinching, but a strategic approach to enhancing your ROI and keeping the project on track. If creating new software is a chess game, cost minimization is about playing your pawns wisely while saving your queens and rooks for the endgame. Here’s how it’s done:

Before we set out, remember that a successful cost minimization strategy should never compromise on the quality of the final product. Instead, it’s about optimizing resources, eliminating wastage, and making smart trade-offs. Here’s your toolbox:

Crystallize Your Requirements: Changes in requirements during later stages can lead to cost escalations by 50-100% or more. Invest time upfront in defining the scope clearly and save on costly revisions later.
Go Agile: Agile methodologies can lead to a cost reduction of up to 20-30%. Delivering in increments allows early feedback, making changes less costly and disruptive.
Outsource Wisely: Outsourcing can save you up to 20-50% in costs. But remember, the wrong partner can cost you more in delays and redoing work. Choose experience and reliability over lowest cost.
Invest in Quality Assurance: Software errors cost the US economy $1.1 trillion in 2020. Investing in thorough testing and quality assurance can save you the high costs of repairing buggy software.
Prioritize Features: A Standish Group survey found that 45% of product features are never used and only 20% are often used. Prioritize features based on cost-benefit analysis and start with those that offer high benefit and low cost.

Mini-Case Study: Navigating a Tight Budget on a Small-Scale Project

As a testament to how cost minimization tactics are not confined to large-scale projects, consider the case of StartUp Pro, a budding entrepreneur incubator. They embarked on a modest project to develop a mentor-matching app with a limited budget of $30,000. Given their resources, every penny had to be used judiciously. Here’s how they made it work:

Defining Requirements. They spent $1,000 on brainstorming sessions and interviews to nail down their requirements, thereby avoiding potential costs from late-stage changes.
Going Agile. By using an Agile approach, they were able to respond quickly to user feedback after each sprint. This flexibility helped them save around $3,000 by avoiding major overhauls at later stages.
Quality Assurance. They allocated $3,000 to rigorous testing. Though it seemed substantial relative to their budget, it paid off by preventing bugs that could have cost up to $10,000 in fixes and damaged user trust.
Prioritizing Features. With a clear idea of their “Must-Have” features, they could direct most of their resources towards functionalities that would deliver the most value to their users, ensuring that their spending was targeted and effective.

StartUp Pro’s experience demonstrates how smaller projects can also benefit from cost minimization strategies. Even with their limited budget, they delivered a successful app that met their user needs while staying within budget, proving that size does not dictate the value or impact of a project. The strategies are scalable; it’s the approach and execution that count.

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Developing Custom Software on Time: A Key to Accelerated Delivery

In the grand chessboard of software development, schedule is often your most unpredictable piece. It can make a difference between releasing a revolutionary product and becoming a mere footnote in the industry’s history. But how can you estimate something so volatile? And can outsourcing be the knight in shining armor that saves your day (and project)? Let’s dive in!

The Stopwatch of Software Development

Time planning in software development is a blend of art and science. It involves meticulous planning, informed guesswork, and a pinch of intuition. Here are some tips to fine-tune your estimations:

Break Down the Project. Deconstruct your project into smaller, manageable tasks. It’s easier and more accurate to estimate time for these individual pieces.
Leverage Past Data. Use data from previous projects to guide your estimates. Historical data can provide a reliable ballpark for your calculations.
Buffer Up. Always add a buffer to your estimates. A good rule of thumb is to add a 20-30% cushion to account for unexpected delays or complications.
Team Input is Crucial. Those who will execute the tasks often have the best sense of how long they’ll take. Involve your team in the estimation process! You will get a much more precise answer to a question of how much time you are going to spend on this project.
Re-Estimate Regularly. As your project progresses, constantly re-evaluate your time estimates. With each stage, you’ll have more information to fine-tune your predictions.

Outsourcing as a Time-Saver

Outsourcing can be a powerful strategy to reduce the required time. Here’s how:

Ready to Roll. Outsourcing partners usually have teams that are ready to start immediately. This reduces the time spent on recruiting, training, and setting up an in-house team, which can take several weeks, if not months.
Experience Counts. Experienced outsourcing software development companies have likely worked on similar projects before. Their expertise can speed up time by avoiding common pitfalls and leveraging proven solutions.
Parallel Processing. You can have multiple tasks done simultaneously by different teams. For example, while one team is working on front-end development, another could be setting up the back-end.
Time Zone Advantage. If your outsourcing partner is in a different time zone, work on your project can continue round the clock. When it’s nighttime at your location, your outsourcing partner’s team can continue the work, effectively doubling productivity hours.

Case Study: Fast-Tracking a HealthTech Project via Outsourcing

Take the case of HealthHubApp (name changed due to a strict NDA), a healthcare startup that wanted to create an app for personalized diet plans. They had a strict timeline of four months to catch the New Year resolution wave.

After breaking down the project and estimating time, they realized it would take an in-house team around six months to complete the project. They turned to offshore software development partner as a solution.

We had a ready team with healthtech experience, so the project was launched in less than 2 weeks. This saved HealthHubApp nearly a month in recruiting and training time (not speaking about economizing on custom software development rates). Also, thanks to our software development team’s prior experience, we were able to avoid some common pitfalls, saving another two weeks.

By working on the algorithms and user interface simultaneously, we saved a client another month. Finally, the time zone difference meant that work was happening almost 24/7, further accelerating the project timeline.

HealthHub’s app was ready in just under four months of precise software development, right in time for the New Year wave, all thanks to strategic time estimation and smart outsourcing. This real-world story demonstrates how outsourcing can be a game-changer in accelerating project timelines.

Wrapping Up: How You Affect Software Development Time and Cost in 2023

Cost of your software. A topic so vast, it can feel like grappling with a universe. But remember, you have the controls. So steer with confidence, and ask your development team to the same.

The complexity of your project, your choice of tech stack, the entire development process, outsourcing vs. in-house — you set these parameters. It’s your hands on the helm that shape the cost trajectory.

The year is 2023. The digital realm? A realm of limitless possibilities. You’re not looking for an off-the-shelf solution. You want custom software. Your vision, actualized.

With over 21 years in the game, we’ve mastered this territory. We turn jargon into English, roadblocks into pathways, costs into investments. We’re not just developers. We’re your partners in innovation. Which kinds of software? Any. Check on what we can do.

Whether it’s a healthtech revolution or a fintech disruption, we’re in it together, from conceptualization to capitalization, always with a watchful eye on quality and cost.

So, what’s next?

Your project. Your rules. Let’s map out your software development journey, together. Get a handle on your potential software development costs in 2023. We’ve created a handy, no-strings-attached pricing estimator. No more guesswork. Just clear, concise figures.

Ready for liftoff? Request your quote and let’s make software history together.

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Written by

Sasha B., Senior Copywriter at QArea

A commercial writer with 12 years of experience. Focuses on content for IT, IoT, robotics, AI and neuroscience-related companies. Open for various tech-savvy writing challenges. Speaks four languages, joins running races, plays tennis, reads sci-fi novels.

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